Sunday, October 05, 2008

Nothing Proposed Will Solve the Credit Crisis

The right terminology leads to more direct problem-solving.Yes, we have a "credit crisis." But taking the facts from a different perspective, this is exactly the same as a "contraction of the money supply." Or, if you prefer, a DEFLATIONARY crisis. We haven't seen deflation since the start of the Great Depression, so the thinking is unfamiliar to most.

Government action can only make a given institution more creditworthy by giving it funding. Do it piecemeal, institution by institution, and you may or may not help the systemic problem, depending on specifics.

People are pulling cash out of accounts and into safes and under mattresses. A fairly small amount of this behavior can collapse lending instutions, even those well-run. The collapse of banks leads to more cash withdrawals, leading to more failures, leading to more withdrawals, and a high-speed reversal of the usual money creation process. For evidence of the current money supply contraction, see, for example:

Vast sums of real money are disappearing from the economy. Only the Federal government can produce more. If this doesn't happen, quickly, an unprecedented financial collapse will ensue. The Federal govenment might need to literally print trillions of dollars.

One immediately hears cries "but that will lead to inflation!!" Umm, yeah. That's why we need to recognize the current problem as a deflationary crisis. One can only reverse a deflationary crisis with inflationary stimulus.About Wall Street CrisisRead the Article at HuffingtonPost